2007 was a year in which the easy long-equity or long-credit bet, or long beta of either, came unstuck.

Nevertheless, it turned out to be a reasonably good year for hedge fund returns. The Asiahedge composite index was up 9.2%, which is roughly twice Libor; and the more representative Asia ex-Japan and Asia including-Japan indices were up 24.6% and 21.1% respectively.

The exception was Japan, where the corresponding Asiahedge long/short index was down 2.6% in dollar terms. The Eurekahedge Asian index rose by 20.27% (in 2006 it rose by 16.78%) and the same firmÆs Japan hedge fund index was down 1.06% (in 2006 it was down 3.03%).

The feeling among select investors is that 2007 represented possibly the most important year for hedge funds in Asia in the last decade.

"One reason is because for the larger managers that acted as direct liquidity providers to issuers, their main competition, ie the banks, fell away in the second half of 2007 due to the crippling effect of the subprime crisis," says Peter Doublas, of Singapore consultancy GFIA. "Arguably, that increased share of funding might become permanent. In terms of demand, current volatility may reduce investor activity briefly, but we feel that the attraction of consistent Libor x2 or x3 returns from emerging markets will become even more attractive to whip-lashed global allocators."

For 2008, investors are seeing continued market volatility, which will be very good for hedge funds; as well as continued liquidity resulting from central bank rate cuts and liquidity infusions, again good for hedge funds in aggregate.

ôRising dispersion of views and prices plus rising uncertainty and volatility will help a swathe of good hedge fund strategies and managers in 2008,ö says Mark Reinisch of fund of hedge funds FRM. And then the fund of fund's plug: ôWe feel the key will be manager selection, as the markets will certainly sort the men from the boys. We adopt a careful beta control approach in our sector portfolios. This will be critical in 2008 as exposure management skills will allow good managers to keep their powder dry to invest in quality and better priced opportunities."

He suggests investors who don't do their homework on funds' risk management are likely to suffer from market turbulence.